Coordination in a supply chain
Supply chain coordination improves the effectiveness of stage of the supply chain.
Lack of coordination can occur due to:
Conflicting objectives of different stages,
Distorted information moving between different stages.
Example: food produces various models with different options. The increased variety makes it difficult for Ford to coordinate information exchange with thousands of suppliers and dealers.
The main challenge is to achieve coordination in supply chain in spite of multiple ownership and increased product variety.
Bullwhip effect
Bullwhip effect refers to the increase in fluctuations in orders as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers.
Bullwhip effect distorts demand information within the supply chain, with different stages having a very different estimate of what demand looks like.
Examples:
Procter & Gamble (P&G)
In the production of “pamapers” diapers, P&G found significant fluctuation in the raw material orders to its suppliers even though sales at retail stores had very little fluctuation.
Hewlett Packard (HP)
Although product demand showed some variability, orders place with the intergrated circuit (IC) division were much more variable.
Impact of bullwhip effect
Performance measure
| Impact of bullwhip Effect |
Manufacturing cost | Increase |
Inventory cost | Increase |
Replenishment lead time | Increase |
Transportation cost | Increase |
Shipping and receiving cost
| Increase |
Level of product Availability | Decrease |
Profitability | Decrease |
Bullwhip effect reduces the profitability of a supply chain by making it more expensive to provide a given level of product availability.
Obstacles to coordination in a supply chain
Incentive obstacles
Incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce overall effectiveness.
If a transportation manager's compensation is linked to the average transportation cost per unit, decisions made can increase inventory costs or hurt customer service.
Sales force offering discounts to increase end-of-period sales will result in jump in orders at end of evaluation period followed by very few orders at the beginning of the next evaluation period.
Information processing obstacles
These obstacles occur when demand information is distorted as it moves between different stages of the supply chain. When forecasts are based on orders received, any variability in customers demand is magnified as orders move up the supply chain. Lack of information sharing between stages of the supply chain magnifies the bullwhip effect.
For example, a planned promotion may be interpreted as a permanent increase in demand
Operational obstacles
Action taken in the course of placing and filling orders can lead to increase in variability. When a firm places orders in lot sizes that are much larger than the lot sizes in which demand arises, variability of order is magnified up the supply chain.
Bullwhip effect is magnified if replenishment lead times between stages are long. Rationing schemes that allocate limiting production in proportion to order placed by retailers lead to a magnification of the bullwhip effect.
Pricing obstacles
Pricing policies for a product lead to an increase in the variability of demand. Lot-size based quantity discounts ultimately result in increased variability. Trade promotions and other short-term discounts result in retailer purchasing larger lots during the discounting period to cover demand during future periods. This results in significantly higher variability in manufacturing shipments than retailer sales.
Behavioral obstacles
Problems in learning within organization that contribute to the bullwhip effect are as follows:
each stage in the supply chain views its actions locally
different stages of the supply chain react to the current local situation
based on local analysis, different stages blame each other for fluctuations
no stage of the supply chain learns from its actions overtime
a lack of trust between supply chain partners causes them to be opportunistic at the cost of overall supply chain performance
Achieving Coordination in Practice
Quantify the bullwhip effect
Mangers should compare the variability in the orders they receive from their customers with the variability in order they place with their suppliers.
Get the top management commitment for coordination
Coordination requires managers at all stages of the supply chain to subordinate their local interests the greater interest of the firm or supply chain.
Top management commitment was a key factor in helping Wal-mart and procter&Gamble set up collaborative forecasting and replenishment teams.
Devote resources to coordination
All parties involved should devote significant managerial resources to foster coordination. One of the best ways to solve coordination problems is through teams made up members to different companies throughout the supply chain.
Focus on communication with other stages
Regular communication helps different stages of the supply chain share their goals and identify common goals and mutually beneficial actions that improve coordination.
Achieve coordination in the entire supply chain
The most powerful party in supply chain should make an effort to achieve coordination in the entire supply chain network.
Use technology to improve connectivity
The interest, enterprise resource planning (ERP) systems, and other information systems can be used to increase the visibility of information throughout the supply chain.
Share the benefits equitably
Mangers from the strongest party in the supply chain relationship must ensure that all parties perceive that benefits are shared in a fair manner.
E-Business and the supply chain
E-Business is the execution of business transactions over the internet. The following supply chain transactions can be conducted over the internet:
Providing information across the supply chain,
Negotiating prices and contacts with customers and suppliers,
Allowing customers to place orders,
Allowing customers to trace orders,
Filling and delivering orders to customers, and
Receiving payments from customers. Business-to-Consumers (B2C) E-business involves transactions between a company and a consumer. Example: Amazon, Dell.com,etc
Business-to-Business (B2B) E-Business involves transaction between two companies.
Examples: W.W.Grainger, McMaster- Carr who sells maintenance, repair, and operations (MRO) supplies to other companies over the internet.
Revenue impact of E-Business
The impact of E-Business can be studied in the following two ways:
Revenue impact of E-Business
Offering direct sales to customers
E-Business allows manufacturers enhance revenues by passing intermediaries and selling directly to the customers.
Providing 24 hour access
E-business attracts customers who may be able to place orders during regular business hours. E-business can be accessed by customers who are geographically distant.
Aggregating information from various sources
E-business offer information regarding a very large selection of product.
Providing personalization and customization of information
The internet offers E-business the ability to use personal info to guide each customers buying and increase sales.
In B2b environment, firms can set up customer specific sites.
Speeding up time to market
A firm with E-business can increase revenues by introducing new products much faster than a firm that uses physical channels.
Implementing flexible pricing
An E-business can easily alter prices over time by changing one entry in the database linked to its web site. This allows for maximizing revenues by setting prices based on current inventories and demand.
Allowing price and service discrimination
An E-business can price- discriminate and alter prices based on the buying power of individual customers to enhance revenues.
Facilitating efficient funds transfer
An E-business can enhance revenues by speeding up collection.
Cost Impact of E-Business
Reducing product handling with a shorter supply chain
A manufacturer using E_business to sell directly to customers is able to reduce handling costs because fewer supply chain stages are involved.
Postponing product differentiation until after an order is placed
An E-business can lower its inventories if it can postpone the introduction of variety until after the customer order is received.
Decreasing delivery cost and time with downloadable product
If the firm is dealing with digitizable product such as software or nusical CD, cost and time of delivery can be drastically reduced.
Reducing facility and processing costs
An E-business can reduce facility costs by centralizing all inventories and decreasing the number of facilities.
Decreasing inventory costs through aggregation
An E-business can aggregate inventories because it does not have to carry inventory close to customer.
Improving supply chain coordination through information sharing
An e-business can easily share demand information throughout the supply chain to dampen the bullwhip effect and improve coordination.
Impact of E-business on Dell Performance
Factor: Revenue
Impact: Increase
Primary causes
Direct sales to customers
Large variety and customization
Faster new product introduction
Fast delivery of customer order
Flexible pricing
Factor: Inventory Costs
Impact: Decrease
Primary Causes:
Aggregation using postponement and Component commonality
Geographic aggregation
Info sharing
Factor: Facility Costs
Impact: Decrease
Primary Causes:
No retail outlets
Customer participation in order placement
Factor: Transportation Costs
Impact: Increase
Primary Cause:
Higher outbound transportation cost.
Setting Up of E-Business in Practice
Integrate the internet with the existing physical network.
Devise shipment pricing strategies that reflect costs. Optimize the e-business logistics to handle packages, not pallets.
Design the e-business supply chain to handle returns efficiently.
Keep customers informed throughout the fulfillment cycle.
Managing Uncertainty in Supply Chain
- Inventory Profile with safety inventory
- Safety inventory is inventory carried to satisfy demand that exceeds the amount forecasted for a given period.
- Safety inventory is carried because demand is uncertain and a product shortage may result if actual demand exceeds the forecasted demand
- Trade-off to be considered is whether to raise the level of safety inventory or to control the level of safety to minimize inventory holding costs.
- The appropriate level of safety inventory is determined by the following:
- The uncertainty of both demand and supply
- The desired level of product availability
- As the uncertainty of supply and demand grows, the required level of safety inventory increases.
- As the desired level of product availability increases, the required level of safety inventory also increases.
- Measuring Product Availability
- Product availability can be measured in the following ways:
- Product Fill Rate
- Product fill rate is the fraction of product demand that is satisfied from product inventory
- Fill rate should be measured over specified amounts of demand rather than time.
- For example, if a company provides products to 90% of its customers from its inventory, then the fill rate is 90%.
- Order Fill Rate
- Order fill rate is the fraction of orders that are filled from available inventory.
- This should be measured over a specified number of orders rather than time.
- In a multi-product scenario, an order is filled from inventory only if alll products in the order can be supplied from the available inventory
- Cycle Service Level
- Cycle service level is the fraction of replenishment cycles that end with all the customer demands being met. A replenishment cycle is the interval between two successive replenishment deliveries
- Replenishment Policies
- The two types of replenishment policies are:
- Continuous Review
- Inventory is continuously tracked and an order for a lot size Q is placed when the inventory declines to the reorder point (ROP)
- Periodic Review
- Inventory status is checked at regular intervals and an order is placed to raise the inventory level to a specified threshold.
- The time between orders is fixed.
- The size of the order can vary depending upon the demand.
- Evaluating a Safety Inventory Given a Replenishment Policy
- Example: Consider a weekly demand of 2500. The manufacturer takes two weeks to fill an order. Orders for 10,000 units are made when the inventory on hand drops to 6000. Evaluate the safety inventory.
- Product Selection
- Substitution refers to the use of one product to satisfy demand for a different product. The two types are:
- Manufacturer-Driven Substitution
- In manufacturer-driven substitution, manufacturer or supplier makes the decision to substitute.
- Typically, the manufacturer substitutes a higher value product for a lower value product in the inventory.
- Customer-Driven Substitution
- In customer-driven substitution, the customer makes the decision to substitute.
- When a customer calls online to place an order and the product requested is not available, the customer is immediately told the availability of all equivalent products.
